On August 23, 2004, the U.S. Department of Labor's new regulations regarding the "White Collar" exemptions under the Fair Labor Standards Act ("FLSA") will take effect. The new regulations entitled FairPay alter the analysis every employer must undertake to determine whether an employee is exempt or non-exempt from the federal minimum wage and overtime requirements. Employers are advised to review the appropriate state wage and hour laws in conjunction with the new FairPay regulations.
As a general rule, all employees are entitled to receive overtime pay - one and one-half times the regular hourly rate of pay - for each hour worked over forty (40) hours in a work week, unless the employee qualifies under one of the recognized industry or job duties exemptions. The most common exemptions are the so-called "White Collar" exemptions for Executive, Administrative, Professional, Computer Employees, and Outside Sales Employees.
The new FairPay regulations help to clarify some of the confusion employers have experienced using the pre-FairPay regulations and simplify the standards by which employees may now qualify for one of the "White Collar" exemptions.
As practitioners and those who inadvertently ventured into the "FLSA World" will recall, the pre-FairPay regulations had two tests, based primarily on the duties an individual performed. Imaginatively, denominated the Long Test and the Short Test, the pre-FairPay regulations required that you analyze the job duties/responsibilities under each test in order to conclude whether overtime pay was warranted. Under the FairPay regulations, the Long and Short Test is replaced by a single duties-based test for each of the covered exemptions.
The Executive Exemption
To qualify for the executive employee exemption, all of the following factors must be present:
The employee must be compensated on a salary basis at a rate not less than $455 per week;
The employee's primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
The employee must customarily and regularly direct the work of at least two or more full-time employees or their equivalent; and
The employee must have the authority to hire or fire other employees, or the employee's suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
The Administrative Exemption
To qualify for the administrative employee exemption, all of the following factors must be present:
The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
The employee's primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and
The employee's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
The Learned And Creative Professional Exemption
To qualify for the learned professional exemption, all of the following factors must be present:
The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
The employee's primary duty must be the performance of work requiring advanced knowledge - defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
The advanced knowledge must be in a field of science or learning; and
The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
To qualify for the creative professional employee exemption, all of the following factors must be present:
The employee must be compensated on a salary or fee basis at a rate not less than $455 per week.
The employee's primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
The Computer Employee Exemption
To qualify for the computer employee exemption, all of the following factors must be met:
The employee must be compensated either on a salary or fee basis at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour;
The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field; and
The employee's primary duty must consist of:
1. The application of systems analysis techniques and procedures, including consulting with users to determine hardware, software or system functional specifications;
2. The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
3. The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
4. The combination of the aforementioned duties, the performance of which requires the same level of skills.
The Outside Sales Exemption
To qualify for the outside sales employee exemption, all of the following factors must be present:
The employee's primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
The employee must be customarily and regularly engaged away from the employer's place or places of business.
The Highly Compensated Employee Exemption
To qualify for the highly compensated employee exemption all the following factors must be present:
The employee must perform office or non-manual work;
The employee must receive total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis); and
The employee must customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for those exemptions.
Primary Duty Test
The FairPay regulations provide a definition of "primary duty," a key term in each of the "white collar" exemptions and which has caused considerable confusion in the past. Specifically, the FairPay regulations define "primary duty" as the principal or most important duty that the employee performs. Further, the FairPay regulations set forth the factors to be considered by an employer when determining the primary duty of an employee, including: (1) the relative importance of the exempt duties as compared with other types of duties; (2) the amount of time spent performing exempt work; (3) the employee's relative freedom from direct supervision; and (4) the relationship between the employee's salary and the wages paid to other employees for the same kind of non-exempt work.
Moreover, the FairPay regulations explicitly state that the term primary duty does not require that an employee spend more than 50% of his/her time performing exempt work, so long as the major duty that the employee performs is exempt work. Employees who spend more than 50% of the time performing exempt work will be presumed to have a primary duty of performing exempt work.
Exercise Of Discretion And Independent Judgment Test
With respect to the confusing and often misapplied "exercise of discretion and independent judgment," the FairPay regulations specify ten factors to be considered in analyzing whether an employee is exercising discretion and independent judgment, including whether the employee: (1) has authority to formulate, effect, interpret, or implement management policies or operating practices; (2) carries out major assignments in conducting the operations of the business; (3) performs work that affects business operations to a substantial degree, even if the employee's assignments are related to operation of a particular segment of the business; (4) has authority to commit the employer in matters that have significant financial impact; (5) has authority to waive or deviate from established policies and procedures without prior approval; (6) has authority to negotiate and bind the company on significant matters; (7) provided consultation or expert advice to management; (8) is involved in planning long- or short-term business objectives; (9) investigates and resolves matters of significance on behalf of management; and (10) represents the company in handling complaints, arbitrating disputes, or resolving grievances.
The Preamble to the FairPay regulations provide that although a case-by-case analysis is always required, an employee who satisfies at least two of these factors will generally be held to exercise discretion and independent judgment.
Salary Test And Deductions
The FairPay regulations have retained the "salary basis requirement" - the requirement that an exempt employee receive a pre-determined salary regardless of the amount of time he/she actually works in a particular week - which existed under the pre-FairPay regulations. In addition, the FairPay regulations retain the six exceptions, under which an employer may make deductions from an exempt employee's pay without forfeiting the exemption and add a seventh exception. Therefore, docking remains permissible: (1) for absences from work for a full day for personal reasons, other than sickness or disability; (2) for absences of a full day occasioned by sickness or disability in accordance with a bona fide plan, policy, or practice providing wage replacement benefits; (3) to offset jury or witness fees or military pay received by the employee; (4) for penalties imposed in good faith for infractions of "safety rules of major significance"; (5) for hours not worked in the first or last weeks of employment; or (6) for hours taken as unpaid leave under the Family and Medical Leave Act ("FMLA").
In addition, docking is now permissible for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of serious workplace conduct rules. The new disciplinary suspension exception will permit employers to suspend exempt employees for full-day increments for serious workplace misconduct, such as sexual harassment, workplace violence, or other similar misconduct. Employers should note, however, that serious workplace misconduct does not include performance and/or attendance issues and that the workplace conduct exception only applies if the suspension is pursuant to a written policy that is applicable to all employees and places employees on notice that particular types of misconduct could result in an unpaid disciplinary suspension.
Window Of Correction
The FairPay regulations preserve the "window of correction" in the existing regulations which provides that isolated or inadvertent deductions such as clerical or timekeeping errors will not defeat the exemption, if the employee is reimbursed. In addition, the FairPay regulations create a new "safe harbor" to ensure that, provided certain circumstances are met, an improper deduction from pay will not destroy the FLSA exemption. In order to qualify for this new "safe harbor," an employer must: (1) have a clearly communicated policy (preferably one in writing, distributed to all employees) that prohibits improper pay deductions; (2) reimburse employees for any improper deductions; and (3) make a good faith commitment toward future compliance.
Although far from a panacea for employers, the FairPay regulations are a welcome clarification for employers who have previously struggled with the exempt/non-exempt analysis.
James Hays is a Partner in the Labor/Employment Law Practice Group of Kelley Drye & Warren LLP.